2016 (12) TMI 1551 - HC - Income Tax

Inapplicability of transfer pricing exercise with respect to loans advanced to subsidiary/AE - provisions of Chapter X of the Income Tax Act and Rule 10A of Income Tax Rules applicability - Held that - In this case, while examining the sum advanced in question, especially the rate of interest, the DRP and later the ITAT closely scrutinized not only the prevalent LIBOR rates but also the risk assessment. The Tribunal as is evident from the extracted part of its reasoning, held that when the DRP itself stated that since Indian banks were charging 250 basis points above LIBOR on similar loans, there was no good reason for holding that the loan advanced to a subsidiary at 247 basis points above the LIBOR rate to be not at arm s length. These findings are essentially factual and based upon the choice of either accepting in entirety the DRP reasoning which itself had found the TPOs approach incorrect or substituting it with the ITAT s reasoning. In other words, as between the views of the DRP and that of the ITAT, this court is being asked preferred that of the former. Ipso facto this does not constitute a question of law, however this Court finds some merit and substance in the revenue s grievance with the ITAT s observations that advances to foreign subsidiaries per se may not constitute international transactions. This court clarifies that such observations should not be treated as binding and that it is up to the concerned Transfer Pricing Officer to undertake the necessary scrutiny having regard to the facts of each case to discern whether indeed the terms of any given loan are at arm s length or not. To that extent the wide observations of the ITAT are not approved but are confined to the facts of the present case. On the first issue, no question of law arises. Disallowance under Section 14A - Held that - The findings of the ITAT that the kind of disallowance made could not be sustained, was entirely fact dependent inasmuch as application of Rule 8D in this case was wronged upon. The assessee had contended successfully that the funds deployed to derive the tax exempt income were its own and were not borrowed. These findings too are factual and cannot constitute questions of law.

Summary

Issues:
1. Applicability of transfer pricing exercise on loans advanced to subsidiary/AE.
2. Justification of deletion of disallowance under Section 14A.

Analysis:

Issue 1: Applicability of transfer pricing exercise on loans advanced to subsidiary/AE
The revenue challenged the decision of the Income Tax Appellate Tribunal (ITAT) for three assessment years, raising two main issues. Firstly, whether the inapplicability of transfer pricing exercise on loans advanced to subsidiary/AE contradicts the provisions of Chapter X of the Income Tax Act and Rule 10A of Income Tax Rules. Secondly, whether the deletion of disallowance under Section 14A was warranted. The assessee, engaged in digital cinema distribution and in-cinema advertisements, had advanced a loan in dollar equivalent to its subsidiary/AE. The Transfer Pricing Officer rejected the assessee's contentions and proposed an adjustment based on the ALP determination, setting the interest rate at 17.26%. The Dispute Resolution Panel (DRP) later adjusted the rate to 8.53% per annum, considering the prevailing LIBOR rate. However, the ITAT overturned the DRP's decision, leading to the revenue's appeal. The ITAT's reasoning emphasized the comparison with similar cases where interest rates were lower, indicating that the loan advanced at 247 basis points above LIBOR was at arm's length. While the Court acknowledged the factual nature of the findings, it noted the need for scrutiny by the Transfer Pricing Officer to determine arm's length terms for each case. The Court dismissed the revenue's appeal on this issue.

Issue 2: Justification of deletion of disallowance under Section 14A
Regarding the deletion of disallowance under Section 14A, the ITAT's decision was found to be fact-dependent, with the application of Rule 8D deemed incorrect. The assessee successfully argued that the funds used to generate tax-exempt income were its own and not borrowed. These factual findings did not raise any legal questions. Consequently, the Court dismissed the appeals and pending applications based on the detailed analysis of both issues, emphasizing the factual nature of the findings and the lack of legal questions raised.